New Turkish cabinet reflects Erdogan's growing power

ANKARA (Reuters) - Turkey's new prime minister vowed on Tuesday to work immediately on forging the stronger presidency wanted by the incumbent, Tayyip Erdogan, and announced a cabinet that signaled policy continuity but left little doubt as to who was in charge.

Top members of the economic management team including Deputy Prime Minister Mehmet Simsek, favored by foreign investors as a reformer, kept their posts in the new government; but around half of the names were reshuffled as Erdogan consolidated his 14-year hold on power.

Prime Minister Binali Yildirim told parliament he would seize a "historic opportunity" to change a constitution born of a 1980 army coup. The new basic law would reflect the fact that the president had for the first time been popularly elected, rather than chosen by parliament.

Erdogan won Turkey's first presidential election in 2014 having stepped down from the prime minister's post with the intention of imbuing a largely ceremonial presidency with strong powers akin to those of the U.S. and French heads of state.

Opponents fear creeping authoritarianism on the part of Erdogan, a polarizing figure who commands fervent support from roughly half the country, helped by a weak and divided opposition that lacks strong leadership.

The nationalist MHP opposition, whose support Erdogan may need to press through changes, said a presidential system would inevitably lead to despotism.

Yildirim told a parliamentary meeting of the ruling AK Party that change was needed as Turkey aims to become a top-10 global economy within seven years.

"Turkey cannot reach its 2023 targets with its current constitution. This suit is too tight for this body now," he said. "We are going to start working immediately on a new constitution that includes a presidential system ... It's the AK Party's most important duty."

Yildirim rejected suggestions that the president, who will chair the new cabinet's first meeting on Wednesday, was meddling in government affairs in violation of the current constitution.

His words reflected the confused nature of a system that, while parliamentary in name, is dominated by Erdogan, by far Turkey's most popular politician but loathed by opponents suspicious of his Islamist ideals and intolerance of dissent.

The lira currency firmed to 2.98 to the dollar after Yildirim announced the cabinet, from below 3.00 beforehand, reflecting investors' relief that Simsek and Finance Minister Naci Agbal had kept their positions. The Istanbul stock market rose 3.4 percent, with banks leading the way.

The two advocate reforms to boost labor productivity and household savings, which economists say are long overdue.

Tim Ash, a strategist at Nomura and a veteran Turkey watcher, said the decision to retain Simsek appeared to be an attempt to keep investors happy, but questioned whether he would have the room to deliver the economic reforms the country needs.

"The power is moving to Erdogan and his less orthodox policy advisers," he wrote in an e-mailed note.

Erdogan favors consumption-led growth and has said high interest rates cause inflation, a stance at odds with orthodox economics. Investors have been unnerved by pressure to push rates down that has been exerted on the central bank, which cut the top end of its rate corridor for a third month on Tuesday.

POLICY CONTINUITY

Yildirim said he would prioritize growth by boosting production, encourage investment and job creation, and maintain fiscal discipline, in a sign of continuity with policies that fueled Turkey's growth during the AKP's first decade in power.

Nihat Zeybekci, a close Erdogan ally, returned as economy minister, a post he had held until last November. Erdogan's son-in-law Berat Albayrak kept his position as energy minister.

In a new government program that Yildirim read out to parliament, he also promised to protect central bank independence and push ahead on structural reforms.

On foreign policy, he said Turkey still aimed for full membership of the European Union but noted frustratingly slow progress so far.

Yildirim added that Ankara would support U.N. efforts towards a resolution in the divided island of Cyprus, and work to boost ties with Iran and mend relations with Moscow, deeply strained since Turkey shot down a Russian warplane last November.

Foreign Minister Mevlut Cavusoglu kept his job in the new cabinet, but former AK Party spokesman Omer Celik became the new EU minister at a critical time in relations with Europe.

Brussels and Ankara are trying to keep a deal on track which would allow Turks visa-free travel to Europe in return for Ankara continuing to stop illegal migrants reaching its shores.

While the EU is desperate for the deal to succeed, it also insists that Turkey meet 72 criteria, including reining in its broad anti-terror laws.

The EU and rights groups say Turkey uses the laws to stifle dissent, while Ankara says it needs sweeping legislation to fight Kurdish insurgents and Islamic State militants who have launched attacks in Turkey.

Cavusoglu warned that Turkey could cancel a range of agreements with the EU if it failed to keep to its promises and said "this is no threat or bluff".

Erdogan see constitutional change as a guarantee against the fractious coalition politics that hampered Turkey in the 1990s.

His opponents, and skeptical Western allies, fear growing authoritarianism. Prosecutors have opened more than 1,800 cases against people for insulting Erdogan since he became president. Opposition newspapers have been shut and journalists and academics critical of government policies sacked.

European Parliament President Martin Schulz described Erdogan's accumulation of power on Monday as a "breathtaking departure from European values".

Additional reporting by Orhan Coskun; Writing by Nick Tattersall; Editing by Ece Toksabay and David Stamp